TUKWILA, Wash. — Startling national re-default rates should not discourage credit unions from initiating or continuing loan modification or workout programs, according to a number of industry experts.
"There's always a potential risk that you're deferring some losses as opposed to taking them up front or even compounding those losses if the collateral is worth even less later. Deferring in and of itself is not a bad thing. Deferring it and compounding the losses is the thing you worry about the most," argued Scott Strand, SVP-member operations at Boeing Employees CU. Strand added that CUs are much better off moving forward with their modification and workout programs as "long as you're effective at balancing loss prevention versus loss deferral."
Individuals who received loan modifications in 2008 re-defaulted at a staggering pace according to the federal comptroller's office. More than half of all loans modified in the first quarter of last year were delinquent within six months and 58% of were more than 30 days past due by eight months. That trend may only continue to rise as 31% of third quarter mods re-defaulted within just three months — a marked rise from the 22% of first quarter mods that fell behind in the first three months.
But many of those reported modifications were on subprime, Alt+A or other "creative" mortgages in which customers relied on home appreciation and refinancing at a later date to afford the property, leading to a high re-default rate. Most credit unions, even in those in the "sand states," avoided those lending products.
With no industry baseline for re-defaults, regulators will likely look more at a credit union's justification for the solutions it offers and to whom they are offered. CUs must also be aware modifications won't solve every member's problems and even perfect candidates for a loan mod could encounter even rougher times and end up defaulting.
"What regulators would look at are the things you do and what it could mean for your future losses. If I'm a credit union and I assume my re-default rate is very low, and I didn't cover for future losses then they may take an interest in that," Strand explained, adding that CUs should press on with commitments to workout and loan mod programs because the benefits far outweigh the risks. "Nothing good comes from a foreclosure or a repo. We're going to avoid many, many more [losses] than we are going to defer or make worse."
Smart Financial CU in Houston is particularly willing to be creative with collection and re-structuring solutions ("How One CU Has Shrunk Delinquency With Revamped Collections Dept.", June 1), but while it does not hesitate to give out extensions up to 120 days, cut interest rates to zero or even issue 30-year mortgages with a one year no-interest balloon, the credit union is careful to only modify loans to members who are committed the institution.
"If you're going to do all these things for the member they have got to have the credit union as their primary financial institution. If I am going to make a commitment to you, you have to make a commitment to me," said COO Dana Rawlings, noting that a face-to-face interview with a troubled member can play a key role in loss prevention. "You can pretty well sense if they are sincere, or if they are just going through the motions. It's that human contact that is so important."
The $390-million credit union has seen a few re-defaults, but Rawlings was quick to defend both Smart Financial's decision to restructure the loans and the members' behavior.
"In those cases it really wasn't the members' fault," he said. "They tried and tried and tried, and only bad things happened to them."
